Mr Chidambaram is on the right track

Finance minister P. Chidambaram has been a “man of action” ever since he took charge earlier this month. He has certainly got it right when he says manufacturing, an engine of growth, must be kickstarted to boost the economy.

Another welcome suggestion was that banks should make equated monthly instalments (EMIs) more affordable so that more people take loans to buy white goods or consumer durables. High EMIs, he felt, were inhibiting growth. This will be music to the ears of consumers desiring to buy washing machines, microwaves or two-wheelers. There are two ways banks can do this — either lowering interest rates or making the loan repayment period longer. The second could be more feasible; and it would certainly help new borrowers with some disposable income.
On lowering of interest rates, it is anyway felt in some quarters that it is high time the RBI brought down key interest rates. It has hiked these rates 13 times in a year and a half, with little or no effect on inflation, which kept rising merrily in food items, in which there are supply side problems that the RBI can do little about, and sometimes in manufacturing. So if interest rates were reduced it would certainly bring down EMI rates, and make EMIs more affordable. More important, it will change the current sentiment of gloom, which is what investors need desperately.
But after sentiments get a lift comes the much bigger problem. And this is where Mr Chidambaram, the man of action, will have to bring all his skills into play. The real boost for the economy will come only when a whole series of major infrastructure projects, now stuck for want of permissions and clearances, get off the ground. If half a dozen key projects, perhaps those where bottlenecks are easier to resolve, start taking off, it will send out a strong, positive signal. India Inc and investors will get the reassurance they seek that the government means business, and the confidence that was shattered over “policy paralysis” will be restored. Mr Chidambaram could begin by calling all the ministers holding key portfolios to sit and work together, and put the restoration of the economy ahead of personal egos and differences. Responsibility must be clearly fixed, for both ministers and key bureaucrats, so that all work for the common good. One sure way to bring down interest rates is, of course, for the government to tackle its fiscal deficit, not really an impossible task if it checks leakage in subsidies and cuts out unnecessary ones. If the government borrows less from banks to pay for its deficit, there will be more money for non-government borrowers and interest rates will automatically come down.